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Progressive tax policy and informal labor in developing economies
Author(s) -
Castañeda Néstor,
Doyle David
Publication year - 2019
Publication title -
governance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.46
H-Index - 76
eISSN - 1468-0491
pISSN - 0952-1895
DOI - 10.1111/gove.12390
Subject(s) - informal sector , economics , developing country , incentive , latin americans , welfare , tax revenue , liberalization , argument (complex analysis) , labour economics , economic policy , market economy , macroeconomics , economic growth , political science , biochemistry , chemistry , law
Governments in many industrializing democracies face difficult policy trade‐offs. Liberalization and informality have placed electoral pressure on them to expand noncontributory social spending. However, governments in developing democracies face constraints when attempting to finance this expansion. In some countries, the informal labor market is very large, thereby undermining the revenue that can be collected through income tax. We argue that this has given rise to a paradoxical situation. Left governments in developing democracies with large informal labor markets have a strong electoral incentive to expand welfare regimes to previously excluded outsiders, but to fiscally underwrite this expansion, they have increasingly been forced to fund their redistributive strategies via a regressive policy instrument, indirect consumption taxation. We examine this argument for a sample of 17 Latin American countries between the years 1990 and 2016. Our results suggest that labor informality forces left governments to turn to indirect taxation.